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Operator
My name is Jenny, and I will be your conference operator today. At this time, I would like to welcome everyone to the Inter4 Quarterly Analyst Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. Thank you. Mr. Fillinger, you may begin your conference.
Jenny
Thank you, operator, and thank you, everyone, for joining us this morning. With me on the call, I have Rick Posbon, Executive Vice President and Chief Financial Officer, and Bart Bender, Senior Vice President of Sales and Marketing. I'll start off by providing a brief recap of our quarter, provide some comments on the market outlook and several strategic initiatives. before passing the call to Rick and Bart. Turning to our quarter, our adjusted EBITDA was a loss of $51.4 million during a very challenging quarter that was impacted by weak pricing. To be clear, current pricing is generally below industry break-even levels, which is simply not sustainable for any extended period of time. With that being said, we have a more positive outlook for the year ahead than we did a year ago. We feel housing demand has been relatively strong in the face of rising interest rates. Rates appear to have peaked and builder sentiment is improving and R&R remains steady. On the supply side, inventories at both the producer and supply chain level are low and operating on a just-in-time basis for shipments. And continued production curtailments are anticipated from the industry, especially if current prices continue. Despite our positive outlook, We intend to manage and continue to manage the business and our balance sheet conservatively. We have reduced our 2024 capital spending from our preliminary guidance set in November to $90 million. We think this is a disciplined move. With our internal CapEx team, we're able to quickly make adjustments, providing us with flexibility and control. At the same time, we continue to make good progress on the monetization of our BC Coast tenures. These and other notable cash inflows, such as tax refunds, that Rick will discuss or expect to help bolster our financial position over the next year, even without any meaningful operating earnings. And I'll turn the call over to Rick, who will walk you through the financials.
Rick Posbon
Thank you, Ian, and good morning all. Please refer to cautionary language regarding forward-looking information in our Q4 MD&A. From a high-level perspective, InterFOR's Q4 financial results reflect further weakening of lumber markets as supply continued to outweigh demand. This weakening is evidenced by the framing lumber composite price dropping 12% quarter over quarter. Lumber prices are currently at an unsustainable level, as a significant portion of the North American lumber industry is likely generating negative EBITDA margins. I'll leave it to Bart to discuss the supply-demand fundamentals in some detail, but speaking from a macroeconomic perspective, there are encouraging signs that haven't yet translated into increased demand and higher lumber prices. The trend of moderating inflation across the North American economy now has central banks contemplating interest rate cuts in the near term. We've seen this reflected in significantly lower 30-year U.S. mortgage rates over the past three months. Lower mortgage rates will benefit housing affordability, not only in terms of reduced interest costs, but also in terms of supporting an increased supply of existing homes for sale. Turning to Q4 earnings, Interfor generated an adjusted EBITDA loss of $51 million. on total revenue of $786 million. Compared to the previous quarter, revenue benefited from a slight 4% increase in lumber shipments, which was more than offset by a 9% decline in the average realized lumber price. On the cost side, reported production costs on the unit of lumber basis were essentially flat quarter over quarter. However, Q4 costs included a $14 million increase in the provision against inventories, whereas the prior quarter included a $3 million reduction. The net loss of $169 million in Q4 reflects several non-recurring charges, including an $85 million provision to facilitate the ongoing monetization of our coastal BC operations, and a $56 million charge to impair certain operating assets in the Pacific Northwest, which was driven by higher log costs and ongoing market weakness. In terms of cash flows, there was a $22 million outflow from operating activities in the quarter, as negative operating earnings were partially offset by the collection of tax refunds totaling $30 million. Combined with capital expenditures of $40 million in the quarter, our net debt to invested capital leverage ratio ended the quarter at 32.8%. Looking ahead regarding capital allocation, we're taking a conservative approach in light of the current lumber market weakness. Our primary focus over the course of 2024 will be on managing our balance sheet conservatively. In line with this focus, we revised our expected capital expenditures for 2024 down to $90 million from $140 million previously budgeted. Additionally, we expect the collection of tax refunds totaling $68 million and the ongoing monetization of our coastal BC forest tenures over the course of 2024 to benefit our financial leverage. To wrap up, Interfor's Q4 results reflect significant lumber market weakness, which we view as unsustainable for the industry as a whole. Fortunately, Interfor has a high-quality, diversified portfolio of operations and is well-positioned to successfully navigate through this period of supply and demand, adjusting towards a sustainable balance. That concludes my remarks. I'll now turn the call over to Bart.
Ian
Thanks, Rick. Turning to our lumber markets, the outlook remains uncertain for the short term and encouraging for the medium to long term. Rick covered the macroeconomic factors which bode well for lumber markets. Certainly, we feel better today about the economic situation than we did at this point in the last four or five quarters. Confidence and optimism exist with our customers and those ultimately using our products. When you look at the end-use sectors of our business, really it comes down to new home construction. Repair and remodel, industrial and non-residential sectors have shown steady lumber demand, whereas new home construction has been variable. Encouragingly, housing starts are showing an improvement trend, especially in single-family construction. We are optimistic that the spring building season will bring greater demand for lumber. However, the exact timing of this is less certain. All last year, the spring building season was less evident until later in the spring, early in the summer. At this time, the volume of European imports were more significant, which is not as relevant this year as those volumes have tapered off significantly. Overall, in-market inventories remain balanced on the low end of the spectrum at today's level of consumption. Looking at the supply side of the equation, we're expecting more capacity to be idled, some of it permanently. Medium to long-term, the dynamics around housing age and inventory, household formation rates, household balance sheets will support robust markets for lumber. I'll stop there and pass it back to you, Ian.
Jenny
Okay, thanks, Bart. So, operator, we're ready to take any questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Keetan Mamchora from BMO Capital Markets. Please ask your question.
Keetan Mamchora
Thank you. Good morning, Ian, Rick, and Bart. Maybe first question, you talked about pricing is at unsustainable level and that there's more curtailments that would be needed. I'm curious, can you talk about your approach to production given market conditions right now in terms of how are you managing the rate at which you all are producing?
Jenny
Morning, Kayten. So, Ian here. So, Kayten, we look regionally and mill-specific on how each mill and region is operating. We have a scorecard that we look at every week that tracks P&L performance, and then if it's below cash cost, there's a another threshold where, you know, you kind of look at what the shutdown costs would be. And then there's a lot of other factors that go into that regionally with, you know, things like, you know, full employment in the U.S. and risks to employees or contractors. So we have a pretty robust, you know, scorecard that we review as an executive team weekly. And we've been doing this for years and years, so it's nothing new for us, but very disciplined approach to run, don't run type situations.
Keetan Mamchora
Understood. And so, Ian, at this point, are kind of all of the mills running across your different regions? Are any of the mills running on reduced shifts or, you know, just can you give any sort of additional color?
Jenny
Yeah, I would say, Ketan, that like our competitors, we're not different to the pricing environment and demand environment. So we've been running through the Christmas period, through January, fairly steady at most or all of our operations. Having said that, we're in a period where if... you know, if there's a weakness or extended pricing environment like we have now, you know, we'll look at those, you know, every week. And if it's a material event, we will for sure be putting that out. But, you know, like we, you know, said in our opening comments, most of the industry, you know, is having a pretty tough time. And, you know, if you even look at, you know, some of the you know, decisions, the US South isn't even, you know, safe in these situations. And there's been some competitors that have made some very prudent moves. And I think that's just a reminder, you know, that, you know, not all US South mills are the same quality. And so I think regarding our 13 mills down there, we're very confident in them. As you know, you've been on our tours down there. pretty solid assets. So I think, you know, my point here is whether it's in British Columbia or Eastern Canada, Pacific Northwest or the South, it's a situation that the industry has been in in 2023 hasn't been great, as you well know. Now, going forward, you know, if you asked us a year ago how we feel about, you know, the outlook, we feel better today than we did a year ago for sure.
Keetan Mamchora
Got it. No, that's helpful context, Ian. And then one for Bart. Bart, can you talk a little bit about what you are seeing on the repair and remodeling side in terms of, you know, kind of pull through and demand? You know, we had existing, you know, sort of home sale data to see they are at sort of multi-year lows. What are you kind of seeing in your demand and what is your expectation for the year?
Ian
Yeah. Um, okay. Um, so on, on the repair of a model site, I mean, obviously we've got a, um, a fairly significant view through our, the business that we're doing with various customers that are, that are targeting that segment of the marketplace. And, you know, I'd almost look at it in two lights. One is, uh, the box stores. Um, and what we're seeing from those folks has been, you know, incredibly steady business, frankly. Um, our programs have, have maintained their pace throughout the year. And I can tell you so far this year, they've been the same. The other side of it is the customer base that's more focused on perhaps some of the seasonal product lines like treated wood and those types of things that would flow through the repair and remodel side of the equation. And I would say that typically you'll see a slowdown in late Q4 and early Q1 and sort of a buildup in what ends up being a fairly robust spring season. And what we're seeing so far that I would just say is typical and that we're expecting those markets to behave very similar to what they did last year. You know, really, when you think of all the end-use sectors, Roberto's model is kind of a good news story. That's the one that's been very steady for us. You know, it's the new home construction site that you see some variability.
Jenny
Okay, Dan, maybe I'll just kind of, to build on Bart's comments, I mean, one metric that we look at in the R&R market is what's the status of, you know, the household balance sheet, and that tends to give us an indication, and they are in our market. So very supportive of that end market, given the strong balance sheets that exist today. So I think in summary, our expectations should be fairly consistent, Bart, with 2023, absent of some major event happening.
Keetan Mamchora
Yeah, OK, now that's helpful, Color. I'll jump back in the queue. Good luck.
Jenny
Thank you.
Matthew McCullough
Thanks.
Operator
Thank you. Your next question is from Matthew McCullough from RBC Capital Mortgage. Please ask your question.
Matthew McCullough
Hi, good morning. Thanks for taking my questions. First, I'd like to ask, if you could just talk through how you'd expect fiber costs to trend by operating region over the next couple of quarters, and with that, whether you're expecting any significant impacts from fire salvage activity as we progress through the year?
Jenny
Yeah, so I'll take a kick at it. Rick, jump in if you think I've missed anything. But thanks for the questions, Matt. So, you know, if we kind of go by region, we're seeing in the short term some stumpage relief in British Columbia, which is very good. And as you know, we have three mills in BC. That's our total exposure. in the southern part of British Columbia that are very, very competitive. So that's great there. The next region, Pacific Northwest, we don't see any major swings up or down, so I think pretty steady. Eastern Canada, particularly in Quebec, we and others are enjoying a lower log cost at this point as a result of the fire salvage going on. Our expectation now is that's probably run its course sometime in the summertime. So just keep that in mind. And in the US South, we're very pleased with the log cost trend and our competitive benchmarking against the average log cost in those regions. That would pretty much cover, I guess, the puts and takes through our platforms across North America.
Matthew McCullough
Great. Thanks for that. Maybe next, are you able to provide any color on what the moving parts are between the preliminary $140 million CapEx budgets and the new revised $90 million budgets and maybe what your flexibility is like to bring some of those projects back if the outlook improves? I know you called out some ongoing cost inflation there, so Just wanted to get your thoughts.
Jenny
Yeah, for sure, Matt. And, you know, you were on our tour a year or so ago down in the south also. So I'll get a little specific. Our major focus on our capital is to complete our Thomaston project in Georgia. That's the largest project we'll have done in the history of Inter4. And the major... phase that we're working on now should be commissioning shortly, going through testing and some startup over the next few months. So we're very excited to kind of get that one behind us. The other projects, the strategic projects that we developed in 2018 for a couple of the other operations down there, we have seen labor costs go up as far as contractors go equipment costs have gone up, lumber markets have toned down, and so we have the engineering largely done on all of those, which is the first thing, and so we have those shelf ready. But I would say that we have a target range internally on our balance sheet, and we're slightly above that now, and we've decided to be disciplined and make sure that you know, we're not, you know, doing projects for the sake of doing projects and focusing more on, you know, the quality of the project and the quantity of the project. And I think it's important too, Matt, to really also point out on our CapEx, Interfor generally over the last handful of years has outspent on a per unit basis, so a production unit, FBM, more than our core competitors. So we've been accelerating capital for several years now. So I don't see any strategic compromise by throttling this back a bit and being prudent and given the market conditions and also finishing off our largest project. We have, like others, experienced longer startups and longer to get to pro forma than some of the other regions. However, our internal CapEx team, which you're aware of we have, this allows us to put more people on these startups than rushing off to do another big project. So our expectations are very high for our Thomaston operation this year.
Matthew McCullough
Great. Thanks for all the detail there. One last one for me, and this might be for Bart. I know you talked about European volumes being pretty steady into North America at a fairly manageable level. Would you expect any change there with some of the shipping issues in the Red Sea in particular, just increased cost of shipping European volumes into Asia? Do you expect that to be a factor for the North American market or not particularly material?
Ian
Well, I think it is. It's always... When you consider the options that the Europeans have and where they can ship their wood, I think what's happening in any of their other more traditional markets is relevant. And so, yeah, the freight has gone up significantly for their Asian business. And so when they compare markets and where they want to ship their products to, that'll be a consideration. I will say, though, that 2023, I mean, we saw a pretty significant volume of the imports come in early in the year. I think this was just kind of clearing out the supply chain issues that they had late in 2022. And so we're not seeing that so far this year and don't expect to see it this year. And so we believe that once things kind of shake out and the volumes become more steady, more typical of what they are today, the delta between 23 and 24 is going to be more like in the range of, say, the volumes that might have been imported in 2020 and 2021. And so, you know, that's about a 20% decline year over year when you do those comparisons, and that's kind of what we expect going forward.
Matthew McCullough
Great. Thanks for the help. That's all for me. I'll turn it back.
Jenny
Thanks, Pat.
Operator
Thank you. Your next question is from Hamir Patel from CIBC Capital Markets. Please ask your question.
Hamir Patel
Hi, good morning. Ian, could you speak to what impact you think the proposed BC Lands Act changes may have on existing tenures for the industry, and also if you see that potentially delaying your coastal tenure sale process?
Jenny
Yeah, for sure. Good question, Humira. I know it's been in the news, particularly in BC over the last period of time, but in many respects, the proposed changes are aligned with legislation that's already in practice, and sometimes that doesn't really get, as you know, the news headlines. So if enacted... We think that there won't be really any impact on the cutting permit approval process, as we've been working under this framework for a number of years. So I would kind of start off with that. Our operational plans, permits are really been operating under this sort of environment for a number of years. You know, I would think that the Minister of Forests, you know, has obviously got to take consideration of public interests in mind with First Nations and shared decision making. But, you know, the industry has been working with First Nations and building relationships for many years and a lot of efforts gone into building those between, you know, government, us, others that operate in the space. So we don't see any negative drawback on that. I know for citizens and foreshores and all the folks that probably haven't had the exposure or the partnerships that we have as an industry might be a bit more sensitive to it, but our foresters have gone through this very diligently and have really provided us with comfort that it's business as usual for us.
Hamir Patel
Great. Thanks, Ian. And just the last question I had for Bart. Bart, can you give us a sense as to where you think inventories are for lumber across the channel?
Ian
Yeah, I would say, you know, I often think of them as balanced, but I think you have to frame that up in the context of what that means. And I You know, I would say based on sort of historical levels, we see them in sort of the lower end range. And I think what's kind of happened here is that supply has been available. So our customers have gotten pretty comfortable with the lead times that are in place today. And so based on the consumption that they see, Um, you know, they're able to drive down their, their working capital and inventories, uh, because they've always gotten restocked fairly quickly. And so, you know, I think that that's where the comment of being balanced comes in, where it, where the comment of being on the low end comes is when, when that's not the case. And so a little uptick in demand, uh, perhaps some, um, you know, some, some supply side dynamics that might come into the equation. that's when those inventories will become a little bit more critical, I think, in the channel.
Hamir Patel
Great. Thanks, Bart. That's all I had. I'll turn it over.
Operator
Thank you. Once again, ladies and gentlemen, please press star 1 should you wish to ask a question. Your next question is from Sean Stewart from TD Securities. Please ask your question.
Sean Stewart
Thanks. Good morning. A couple of questions. Ian, I wanted to follow up on the CapEx budget reduction and you're positioning it as capital cost inflation, which is understandable and not hitting your return hurdles. Is there any line of sight on this inflation peaking at this point? When I look at some broader indices for steel or other I guess, major component pieces, it would look like that started to crest. Are you getting any sense that you're going to see potential relief on those cost inputs for capital projects?
Jenny
I hope so, Sean. I think a lot of the pricing that our suppliers do is they often look at what the last transaction price was on a on a mill and then kind of value their equipment based on that. So there were some high points on transactions that have happened over the last couple of years that have given equipment suppliers confidence to raise prices in addition to their material costs going up. So I would think that that's gonna get tapered. The labor costs are not going down. And so when you you know, hire a, you know, mechanical or structural steel contractor or civil contractors to come in. Those prices are not, you know, coming down. They're often driven by labor and per hour rates. So I don't see a lot of that. Yeah, I would say, though, Sean, like, you know, like I've pointed out, we have, you know, outspent on our capital program, you know, against a couple of our core competitors over the last several years, so it's a natural tapering down that we'll see in Inter4 going forward. But, you know, also the balance sheet, you know, at Inter4, you know, when we set internal targets and we have one on that and, you know, we'll make decisions in addition to, you know, whether it's, you know, completing a project, that is a factor also. So I would say it's a combination of both and we don't take it lightly. but we definitely want to drive down our net debt to invested capital, and we'll pull the levers to do that, and once we get it back into our target range, you know, we have a lot of flexibility to, you know, deploy capital in, you know, more ways than we have today, so we want to get there, and part of that is looking at the projects, making sure the paybacks and the startup, you know, curves and expectations are realistic, and we always look back at our last project and kind of go, okay, well, let's use that as the startup for the next one. So I feel really good about what we're doing, and I think it's timing-wise great, and the benefit is we're also taking action on the balance sheet because of this. So I'll leave it at that.
Sean Stewart
That's useful context. Thanks. Second question on the remaining coastal tenure sales. The remaining 1.4 million cubic meters of AAC, any reason that valuation on those potential sales would differ materially from what you were able to secure for the November sale? I appreciate it was a smaller tenure, but any differences in species makes yields for that chunk versus what you're going to be targeting selling over the next couple of years.
Rick Posbon
Good morning, Sean. It's Rick speaking. On that, we don't expect any material change in terms of the valuation. There's several transactions we're working on at the moment and we're comfortable with where those valuations are turning out and our expectation is over the next 12 to 24 months, we'll realize the full benefit of those 10-year sales in line with the recent valuations you've seen.
Sean Stewart
Thanks for that, Rick. That's all I have. Thanks, guys.
Operator
Thanks, Sean.
Matthew McCullough
Thanks.
Operator
Thank you. Your next question is from Ben Isaacson from Scotiabank. Please ask your question.
Ben Isaacson
Good morning. Thank you. Good to be on the call. You mentioned that we're below industry break-even levels. How much more capacity cuts do we need to see? In your experience, do you think the rationalization response you're seeing is normal?
Jenny
Ben, we got about half of that. We're cutting out. I'm sorry. Can you hear me now? I'll read back what I heard, which was what kind of rationalization or curtailment are we seeing or expecting? When we go through the data from 2023, we see somewhere in the neighborhood of north of 2 billion board feet that actually was curtailed during 2023, which is not insignificant. I think so far in the first five or six weeks of 2024, it's somewhere in the neighborhood of 800 million board feet. And we applaud those decisions. We think that more will come out sooner than later. And we expect that we'll be looking at that closely also over the next month or so. And if prices continue to show no appreciation, then I would expect capacity be curtailed throughout the industry. And at this point, we don't have anything material to discuss on that. But if we get to that point, then we'll definitely let our folks know in the street. But we're not at that. We don't have anything today. But I would caution that, saying that I think there's more to come.
Ben Isaacson
That's helpful. I'm sorry if you couldn't hear me before. You had previously talked about lumber capacity, like your growth plan of about 7 BBF by 2027. Is that timing still on the table? And if so, how does the scaling back on CAPEX impact the cadence of that capacity ramp? And maybe as part of that, with the move to 90 million on CAPEX, how much of that is growth versus sustaining?
Jenny
Yeah, so our $7 billion by 2027 is really an internal target that we were shooting for. I would say that those targets move a little bit here and there, but we are a growth company. We've been the most aggressive on growth over the last few years in the lumber space. We tend to see ourselves as being able to pick up assets that are, you know, mid-quartile and spending time on them to make them top quartile. So that strategy hasn't changed. I would say that consolidation and the number of potential deals that are on the table today versus where they were two years ago is slim to none. And so I think we just have to be responsive to what's out there, making sure that we're you know, disciplined in our growth, but we're, you know, we're not holding ourselves. There's nothing in our performance reviews that say, you know, we're going to get to $7 billion more feed. It's more, you know, can we, you know, pick up an asset, own it for a period of time, and then get the return and the margin out of it. So I would taper down the $7 billion for sure and just probably look at it as, you know, we'll be opportunistic. But, you know, there's nothing on the table yet. today. And as far as our CapEx growth goes, our major project really is the Thomaston, which is, I forget how much the capacity is, but it's essentially doubling that one mil. But Rick, did you have anything?
Rick Posbon
Yeah. Hey, Ben, it's Rick Posbon. Just in terms of the $90 million, it breaks down to about $50 million for sustaining CapEx and $40 million for growth CapEx. And as Ian mentioned, the $40 million of growth capex is primarily weighted to our Thomaston project to get that across the finish line.
Ben Isaacson
That's great. Thanks so much, guys. Thanks, man.
Operator
Thank you. There are no further questions at this time. I will now hand the call back to Mr. Fillinger for the closing remarks.
Jenny
Okay, just to wrap up, thanks, everybody, for your interest in our company, and feel free to reach out to myself, Rick, or Bart at any time. And, operator, this concludes our call.
Operator
Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
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